The Kodak Moment: A Failure of Management Imagination?

On January 19, 2012, Kodak, the once iconic US company which had democratized photography, filed for chapter 11 in the U.S. Bankruptcy Court in the Southern District of New York.

To the millions of lives and memories touched by Kodak over the years, the news may have come as a huge surprise. But to those who make a living following companies' growth or demise, there was zero surprise. Kodak's ties with its customers had been weakening over the years - when Kodak was synonymous with amateur photography. Now, customers, both new and experienced, were choosing to bypass Kodak altogether. Simply put, Kodak had nothing to offer them; nothing valuable enough anyway, for them to stay.

So, what happened? How did a company that once owned the hill tumble down and lose its crown? Let's see if we can understand what happened.

When George Eastman decided "to make the camera as convenient as the pencil" which is how he explained Kodak's value proposition, he literally transformed our lives by introducing us to our personal "Kodak moments" - the memories that the individual captures as a way to celebrate, share, and communicate our most precious memories with our friends and families.

Kodak was the Apple and Facebook of its day because Eastman understood what customers valued. He realized that technology could change markets - overnight. And of course, that is precisely how he started Kodak - by creating the dry-plate technology which made photography accessible to all.

But Eastman could have easily failed to see the significance of the new. He could have stuck to his profitable business model, hypnotized by the massive profits his dry-plates produced for Kodak. He could have failed, but he did not. In fact, he bet the company not once, but twice, and both times he won because he kept stuck with his imagination - he clearly had the capability to envision how the right technology could transform the customer experience for the better.

The first time Eastman bet the company was when dry-plates were threatened by a new technology. Eastman gave up on his dry-plate business to pursue a promising new technology developed by Kodak - film. Eastman's first simple camera in 1888 was a wooden, light-tight box with a simple lens and shutter that was factory-filled with film. Priced at $22.00, the world was forever changed.

Later, Eastman faced another existential Kodak moment when he again bet the company's future on color film, which at the time was not as high in quality as the established black and white.

Eastman built the Kodak empire on a deceptively simple "razor and blades strategy," selling inexpensive cameras and making money on the back end on film and printing.

So what happened?

The inexpensive business historian known as Wikipedia tells us that the problem with Kodak was that its "unassailable competitive position would foster an unimaginative and complacent corporate culture."

In 1975, a Kodak engineer - Steve Sasson - invented the digital camera. But this time Kodak was no longer the Kodak of George Eastman. As Sasson desperately wandered around the company trying to convince senior executives of the potential of his discovery, he was met with the mindset of a company in love with the present. Sadly, there were no George Eastmans left at Kodak.

His presentations "met with a lot of curiosity, some annoyance." According to Sasson, "Many times people talked about all the reasons why it would never happen. But there were many people that quietly looked at it and said, 'Boy, it's a long time, but I don't see that it won't happen.'"

As Kodak "fumbled the future," Japanese firms like Sony leapfrogged Kodak, establishing a lasting reputation for inexpensive digital cameras.

At the time of its bankruptcy filing, Kodak gave several reasons for taking such drastic action: "to bolster liquidity in the U.S. and abroad, monetize non-strategic intellectual property, fairly resolve legacy liabilities, and enable the Company to focus on its most valuable business lines." In the same release, Kodak also stated that they had "made pioneering investments in digital and materials deposition technologies in recent years, generating approximately 75% of its revenue from digital businesses in 2011."

So while Kodak eventually got serious, and become the world's leading seller of digital cameras, it had lost its profit engine. The "razor and blades" business model had evaporated. Without profits driven by the sales of film, Kodak was in a black hole of its own making.

Two other fatal flaws can be observed in hindsight.

The first was Kodak's hubris in terms of marketing. As Adrian Woolridge wrote in his Schumpeter column, Kodak made the fatal mistake of "competing through one's marketing rather than taking the harder route of developing new products and new businesses." As we'll see, its competitor Fuji Films - facing exactly the same predicament as Kodak - has managed to survive and thrive in the same business climate that drove Kodak to ruin.

The second fatal flaw was, in my view, the mindset of the executive team. In 1989, the board placed the wrong bet when they chose Kay Whitmore as CEO over Phil Samper. Whitmore was a hardliner - a veteran of the traditional film business. Samper (the digital "hope") left to join Sun Microsystems. Three years later, the board fired Whitmore, and then went on to institute a revolving door policy which saw a line of CEOs fail one after the other.

To this very day, Kodak has an identity crisis: it does not understand who its customer is, and in its dithering, it no longer knows what Kodak is. The current Chairman and Chief Executive Antonio Perez is an HP printer executive, and has predictably steered Kodak toward consumer and commercial printers.

He says that the bankruptcy will help Kodak maximize the value of patents related to digital imaging. The final strategy? Litigation. According to Reuters, Kodak is trying to create new revenue streams using extensive litigation with rivals such as Apple Inc, BlackBerry maker Research in Motion Ltd, South Korea's Samsung Electronics Co and Taiwan's HTC Corp.
The failure of Kodak is a failure of management imagination. It is the failure of the executive mindset that no longer is connected to the customer.

The sad truth is when you take a photo today, Kodak is not part of the picture.

Kodak's story is neither peculiar, nor unique. To attribute its crumbling relationship with customers to a single disruptive technology or market trend - example, digital transformation, would be overly simplistic. What happened to Kodak is a failing that repeatedly expresses itself in countless companies across the globe. They lost touch with their customers.